Sunday, August 18, 2013

China's "flash rally" will further erode confidence in domestic markets

China's stock market has experienced another setback to its credibility when Everbright Securities' trading error caused China's version of "flash crash". It was actually a "flash rally" generated by the brokerage firm's massive buy orders (someone "fat-fingered" an extra zero or two). The firm was trading with its proprietary account.

The Shanghai Composite intraday (source:Yahoo/finance)

Bloomberg: - “When the proprietary operation of the strategic investment department of Everbright Securities used its independent arbitrage system, it encountered a problem,” Everbright said in its statement to the Shanghai stock exchange last week. All other operations are normal, China’s fifth-largest brokerage by market value said.

Given the capitalization of the nation's companies, China's stock market is relatively thinly traded, making it more vulnerable to large orders. Sadly, anecdotal evidence suggests that retail investors often get "picked off" by trading programs managed by brokerage firms running "strategic investment departments" (which of course is not unique to China). It is no wonder that the percentage of dormant retail accounts has been rising for years (see post). This latest incident will further erode retail investors' confidence in the nation's domestic markets.